Tags: clean | energy

Clean Energy Winners With Vinod Khosla

By    |   Wednesday, 02 July 2008 03:45 PM EDT

Forbes 400 member Vinod Khosla is one of the co-founders of Sun Microsystems. No longer focused on the day-to-day management of the company, Khosla these days spends his time as a successful venture capitalist. He is considered to be among the most influential personalities in Silicon Valley.

With a net worth estimated at $1.5 billion, Khosla is the 315th richest American. Through his venture capital firm Khosla Ventures, he has a long track record of finding winners in new technologies such as the Internet, software companies, and hardware technology.

Recently, Khosla’s interest has turned to so-called ‘clean technologies’, and he has been placing large bets on companies involved in bio-refineries for alternative energy sources, solar and wind power generation, and other environmentally friendly technologies.

Part of becoming a successful investor is having the ability to control emotions and face the cold realities of the market place. Khosla does this very well and cautions other investors about the risks associated with green investing.

“Every strong investment cycle results in a bubble, unfortunately,” he recently told an interviewer.

Recalling history, he added, “I always point to the 1830s, when railroads started expanding in England. If you got permission to build a rail link between two towns, you could offer scrips on the market. And people started going public. Doesn't this sound very much like the dot-com bubble? Or the telecom bubble? Or the PC bubble in the '80s?”

It also sounds like the current rush into stocks that claim to have technologies that will be able to lower gas prices or save the planet.

For this week’s screen, we looked at how we can find potential winners without choosing one of the many startups that only have hope as the basis of their business plans. The first step is to look beyond the hype to find companies with solid fundamentals:

  • The investment universe is limited to stocks within the WilderHill Clean Energy Index, which screens companies for minimum capitalization and revenue requirements. This helps avoid companies with little chance of success.

  • Positive cash flow in the most recent year. This should prevent us from making the mistake of buying into companies modeled on one of the common causes of failure during the Internet boom. In that mania, some companies focused first on buying talent and market share with little thought to generating revenue or profitability.

  • Positive earnings estimates for the current fiscal year should limit us to investments in companies whose products are being rewarded by their customers with actual sales.

  • P/E ratios less than 100, to avoid overpaying for very small earnings.

  • Price within the upper half of its 52-week range to catch stocks recognized by other investors in the market as potential leaders in their fields.

    This week’s scan finds some large companies with exposure to new technologies, along with some volatile early entrants:

    Air Products & Chemicals (APD) The company has patents on lithium-ion batteries, considered by many to be the best option for hybrid engines. While developing that technology, APD is selling oxygen to power plants to help them reduce emissions from coal. Trading near 100 with a P/E ratio of 19, these technologies don’t seem to be fully factored into future earnings.

    Applied Materials (AMAT) The semiconductor giant is pushing hard into solar film technology, a natural extension of its core expertise. With little risk to future profits, AMAT was recently trading at 19 and paying a small dividend of 1.2 percent.

    Calpine (CPN) produces the majority of its revenues from natural gas powered electrical generation facilities. But, it also generates geothermal energy and operates 17 of these plants in Northern California. Earnings are projected to grow by 50 percent a year over the next five years. Recent price: 22.53.

    Cree (CREE) is a stock reminiscent of the Internet boom. It has a game changing technology with LED lights that may be capable of replacing compact fluorescent bulbs. It also has an Internet darling sized P/E ratio of 62 at the recent price of 22.60 and Internet-sized risk.

    Gushan Environmental Energy (GU) combines clean energy and China into a single investment. The operator of Chinese biodiesel plants saw earnings grow by 90 percent in the past year, and analysts expect this pace to hold up. The respected investment firm BlackRock holds a large stake in the company which recently traded at 11.77.

    JA Solar Holdings (JASO) Another Chinese company, JASO makes solar cells and had sales of more than half a billion dollars last year. Its P/E ratio of 30 is less than half the P/E ratio of current high flyer First Solar, a competitor with about the same amount of sales. JASO recently sold for about 15 a share.

    MEMC Electronic Materials (WFR) Like AMAT, WFR is poised to profit from an expansion of its product line into green technologies. It has a return on equity near 40 percent, a number Warren Buffett considers to be the best gauge of management effectiveness. Recently trading at 58.10.

    Ormat Technologies (ORA) The largest builder of geothermal energy plants in the world, ORA has more work than they can handle right now. Their six month backlog is likely to grow, as are earnings. BlackRock also holds a large stake in this company, which was recently trading near 50.

    ReneSola (SOL) A Chinese manufacturer of solar wafers is expanding rapidly, and analysts expect the value of the stock to double in the next year. With earnings estimates rapidly increasing, the P/E ratio of 30 at the recent price of 14.13 seems like a bargain.

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    Forbes 400 member Vinod Khosla is one of the co-founders of Sun Microsystems. No longer focused on the day-to-day management of the company, Khosla these days spends his time as a successful venture capitalist. He is considered to be among the most influential personalities...
    Wednesday, 02 July 2008 03:45 PM
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